With financial markets having come a long way since the 2008 financial crisis, there is a recognition among investors that we are late in the cycle. In economic terms too, there is a growing sense that a downturn may be lurking around the corner.
Cautious investors, and new family mandates in particular, may feel a portfolio that is fully invested in a strategic asset allocation with significant exposure to equities is a little too high up the risk curve for them.
But staying in cash is not always the appropriate option either, as it is a conservative approach that offers too little a return. Interest rates are still at low levels, so the value of cash held on deposit is gradually eroded over time by inflation.
If you’re holding sizeable sums of cash right now, protecting that capital in the later stages of the economic and market cycle will be a clear priority. In these situations, we believe a good strategy is to get ‘paid to wait’.
This means building a portfolio that can generate a reasonable yield with a minimum amount of risk as a stop gap until more rewarding long-term opportunities arise. In essence, this involves holding assets that have defensive qualities and offer a yield in excess of inflation.
In short: as this late-cycle phase runs its course over the next year or two, we earn a living, but we don’t take on too much risk.
Returns on long-dated bonds are expected to be more volatile for the foreseeable future, so we believe the best strategy for lower-risk investors is to adopt a short-duration strategy focusing on high-quality issuers.
The value of investments and any income from them can fall as well as rise and neither is guaranteed. Investors may not get back the capital they invested. Past performance is not indicative of future performance. The material is provided for informational purposes only. No news or research item is a personal recommendation to trade. Nothing contained herein constitutes investment, legal, tax or other advice.
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